When you look at the first-time buyer market in the UK at present, you might suggest it is a case of ‘swings and roundabouts’.
For instance, the latest first-time buyer figures from UK Finance – for November last year – do show the number of mortgages completed for this demographic rising year-on-year. In the penultimate month of 2018, 36,200 new first-time buyer mortgages were completed, which was a 5.8% increase on November 2017, with lending at £6bn, which is 9.1% up on the same month a year previously.
However, there are always some mixed messages to navigate through when it comes to first-timers. UK Finance, for example, says the average first-time buyer is aged 30 but recent statistics from the Office for National Statistics (ONS) suggest that individuals are now having to wait, on average, eight years longer to get a first foot on the ladder than they did bacl in 1997, and six years longer than they did in 2007.
That means that it now takes until age 34 for more than half of the population to own their home, compared to 26 at the tail end of the nineties, and 28 just over 11 years ago. It suggests that an increase in average house prices by more than 270%, over the past 20 years, has been the major reason behind this, and you would have to agree that – coupled with stagnant wage inflation – this tells the prevailing story of first-time buyers’ experience during that period.
It is for this very reason why the ‘Bank of Mum & Dad’ (BOMAD) is now such an integral part of the first-time buyer landscape. We’re all aware of its unofficial status as a top 10 lender, and we are close to parental help to buy a first home becoming a ‘rite of passage’ for parents along with changing a first nappy, capturing a first step on camera, and making sure they hold onto the first lost tooth.
What has interested me about the rise in BOMAD, and the willingness of lenders to produce more product resource aimed in their direction, is that these individuals are often forgotten about when the deal is completed for their offspring. So, the money might be handed over to help with a deposit, or it might be placed in a savings account, or they are secured as a guarantor but, when it comes to the advice provided, the focus might tend to be on the first-timer buyer rather than the parent.
Now, I’m not suggesting that every adviser simply overlooks the parental contribution, but a recent report from the London School of Economics (LSE) said that only 8% of parents who gave money to a child for a deposit sought advice, while 14% sought legal advice. The numbers are not much different for those who are helping children with mortgage payments (14% and 12% respectively) but this also begs the question why parents are ‘topping up’ mortgage payments when the lender should only have judged the affordability of the loan based on the first-time buyer’s ability to pay the mortgage?
You can see that we are entering something of a grey area here, and it’s noticeable that all the focus on the help of the BOMAD and how important it is, never really focuses on what happens should things go wrong. What happens if the child stops paying the mortgage? What happens to the money sat in those savings accounts? Of course, what happens is that the lender follows through on the contract terms which means that money is used for the purpose it was intended for.
But, do parents truly understand that they may be liable for their offspring’s failure to pay, or that the money they expected to see again in five years’ time, for example, is actually going to be used up? Given this, the fact so few parents get advice is rather worrying, and let’s be honest, there is likely to be a growing number of such transactions in the future, so the chances there will be an increase in the number of such cases is high.
However, what this does, is present an opportunity for advisers to ensure that all generations get the advice they need in these circumstances. As mentioned, I’m sure many advisers are spelling this out, but how many parents don’t currently feel they’re doing anything which requires an advice element? Perhaps they believe they’re simply handing over cash and that’s the end of it?
We need to have a much more interlinked approach in these cases, considering the wants and needs of both the first-time buyer and any parent that is seeking to help them, to ensure no-one is left high and dry should this process not work out as they envisage. Indeed, if we could grow the number of high LTV mortgage products available, then perhaps the reliance on BOMAD may not be as all-consuming as it can appear. Advisers are clearly in the best position to do this, but support from lenders in this area would also be a significant step forward.
Pad Bamford is business development director at AmTrust Mortgage & Credit